The Different Kinds of Debt

Money

They say money doesn’t buy happiness, which may be true, but money does help us live the lives that we want and need. It helps us have a roof over our head, food on our table, a car to get us to work every day, and the list goes on. However, according to a survey, 27% of Canadians are unable to save any portion of their monthly income and 37% feel overwhelmed by their debt.

These statistics aren’t surprising for most people. Home ownership has become a distant reality to many these days with the average price of a home in Ontario and across Canada being over half a million dollars. The real estate market is driving the cost of living to new levels, even if you are renting the constant rent increases are becoming not manageable for many. Stats Can has reported that 65% of all household debt is mortgage debt and when we look at consumer debt, it’s far from declining. Auto loans are up almost 1.5% annually. Canadians have accumulated a total of $2.08 trillion in household debt.

Let’s talk a bit about debt and the types of debt. For many people understanding debt, and understanding the different types can be challenging. This isn’t something we learn in school, even though it should be.

Types of Debt

Loans and other financing methods available to consumers fall under two main categories which is secured and unsecured debt. The difference between the two is the presence or absence of collateral. Collateral, which is part of secured debt, is a property or other asset that a borrower offers as a way for a lender to secure a loan or financing. If the borrower stops making the payments required on that loan, the lender can seize the collateral to recuperate the losses. Collateral offers security to the lender, and loans with collateral usually have lower interest rates than unsecured debt.

Unsecured debt can be a personal or business debt. However, as a result to it being a high risk to the lender, interest rates are higher which means that this type of debt increases the financial burden on the borrower. To wipe out unsecured debt, a borrower can file for bankruptcy, but this huge step makes it difficult to ever obtain future loans. An example of unsecured debt is a GoDay Payday Loan.  

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Secured debt has two primary ways to raise capital, either debt or equity. Equity is ownership and promises future earnings. For example, if you were taking out a business loan for a new business venture, you have forecasted your small business will make a certain amount of dollars. However, if the company fails, the investor/lender may lose out. Debt, however, implies a promise of repayment and has a high degree of seniority if a person/company was to file for bankruptcy.

Aside from secured and unsecured debt, there’s also revolving debt. Revolving debt is an agreement made between a lender and consumer that allows the consumer to borrow an amount up to a maximum limit on a regular basis. An example of this is a line of credit and credit card. A credit card has a limit, you’re able to spend up to that limit, and then once you pay it off, you are able to spend up to that limit again, and so on. Revolving debt can be secured or unsecured. If secured for example it may be a home equity line of credit, for unsecured it be a credit card.

Mortgages are another popular type of debt and it’s the largest debt many consumers carry. Mortgages are loans created to purchase homes. Mortgages usually have the lowest interest rate of any consumer loan product and the interest can be deducted on your taxes. Usually a mortgage is issued on a 15 or 30 year term to keep monthly payments affordable for homeowners.

Where Your Debt Is Accumulating

Under secured and unsecured debt falls a long list of different types of debt you can accumulate. Here are just some of the types of debt that you can have which can add up quickly.

Credit Card Debt

Credit card debt is an unsecured type of debt, and can be a common type of debt for many people. Credit cards are relatively easy to get, and often people will depend on them as a lifeline when their regular bank account doesn’t have the money that they need. The thing about building up debt on credit cards is that you can bury yourself in a hole very quickly and it can feel next to impossible to pay off those minimum payments every month.

Using credit cards responsibly is important. Don’t spend more than you know you can pay back, don’t lose track of your minimum payments and forge to pay them, and don’t have more credit cards than you can manage, or too high of a credit card limit than you need.

Student Loan Debt

Often times, in order to be able to afford to get an education at college or university, you’ll likely need to take out a student loan to help you pay for the expenses that go along with it. You’re not alone. In a recent Global News article, it reported that Canadian students collectively owe over $28 billion in student loans to all levels of government.

A common student loan is often through the government, if you are eligible for them (like OSAP in Ontario), however, student not eligible for government loans, will often take out a line of credit or something similar. It’s said that students typically will then take between 9-15 years to fully pay off their loan, and often this time frame overlaps to when Canadians are most likely to start a family.

Medical Debt

Thankfully living in Canada, medical debt isn’t as common of a debt as in other countries like the United States. We are blessed with healthcare that covers a lot of the things that may pop up throughout our lifetime. However, there are still some things that aren’t covered by our healthcare system or health benefits (if we’re lucky enough to have them). Whether that’s prescriptions, dental work, or eye care, for those that don’t have the income to afford these things, or require more than normal care in areas that aren’t covered, the cost of medical expenses can add up quick.

Past-Due Bills

It’s easy to get to that time of month where all your bills are due only to realize that you just don’t have the cash to cover them all. You then find yourself picking and choosing if you don’t want your heat to go off, or your water. Letting bills go past-due can not only harm your credit score and prevent you from getting loans or financial assistance down the line, but it can also add up quick with interest. Make sure to have your bills under control and payment plan that works for you and your income.

Debt can be a confusing thing to navigate, but understand the types of debt that you have, consolidating them when possible, and figuring out manageable goals to pay them off without drowning in it is important. It doesn’t take long for debt to become out of control, so make sure you are only borrowing what you need and what you can pay off.

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